Game-theoretic analysis of trade-in services in closed-loop supply chains

We develop a two-period model to investigate the trade-in service in a closed-loop supply chain consisting of a manufacturer and a retailer. In the supply chain, we consider two options for the trade-in service. The first one is Scenario M, in which the manufacturer collects the used products from trade-in customers by herself; and the second one is Scenario R, in which the manufacturer outsources the trade-in service to the retailer and obtains the used products from the retailer at a buy-back price. Accordingly, the firm in charge of the service needs to determine a rebate rate. We show that both firms prefer to operate the trade-in service by themselves in most cases, and we derive the condition for each firm to prefer a scenario and also the condition under which the supply chain is better off from a scenario. Compared to Scenario M, trade-in customers can enjoy lower prices in two periods in Scenario R, although the second-period sales price for new customers is higher. We also perform a numerical study to investigate the impacts of major parameters on the optimal prices, rebate rate, profits, and the conditions for each firm’s and the supply chain’s scenario preferences. The difference between trade-in prices in the two scenarios is larger when trade-in customers are more sensitive to the price, whereas the difference becomes smaller when the manufacturer obtains a higher net gain from handling returned products.